Influence of reporting enforcement on compliance with IAS 38

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Amsterdam Business School

Influence of Reporting Enforcement on

Compliance with IAS 38

Name: Huub Groenestein

Student number: 6084400

Thesis supervisor: A. Sikalidis

Date: 19 June 2016

Word count: 16516

MSc Accountancy & Control, specialization Accountancy

Faculty of Economics and Business, University of Amsterdam

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1 Statement of Originality

This document is written by student Huub Groenestein who declares to take full responsibility for the contents of this document.

I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it.

The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.

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Abstract

When implementation of IFRS became mandatory, EU member states were also required to install effective enforcement mechanisms (Ernstberger et al. 2012 p218). Studies thereafter still show substantial non-compliance with International Financial Reporting Standards and International Accounting Standards. Specifically, they found heterogeneous implementation of IFRS and IAS, with respect to disclosure rules (Glaum et al. 2013, Street and Gray 2001, Daske et al. 2008). That leads to the question whether reporting enforcement contributes to higher compliance levels for companies domiciled in that country. Prior research, providing initial evidence for this research question, is done in the period around the mandatory implementation and could reflect this accounting change (Ernstberger et al. 2012, Daske et al. 2008 and Glaum et al. 2013). This paper studies the influence of reporting enforcement on the compliance levels of required disclosures. Findings show a highly significant and substantial influence of two enforcement proxies on compliance with disclosure requirements. Being a European Union member and having a relatively high rule of law value contributes to high compliance rates with IFRS 3 and IAS 38. Besides, the findings show some proof that companies domiciled in countries with a formal enforcement system comply better with required disclosures. Altogether, reporting enforcement is positively influencing the compliance levels of required disclosures. But even with mandatory IFRS and reporting enforcement are companies not fully complying with disclosure requirements of IAS 38.

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1 Introduction

‘EU approves Shell’s takeover of BG Group’ (Wall Street Journal, 2 September 2015). Royal Dutch Shell is planning to take over the BG Group for a 70 billion cash and share deal. But before they are allowed to merge they need approval of some authorities. These authorities investigate whether the takeover allows Shell to influence the oil and gas prices and if it brings competition distortions. In June the US authorities approved the deal and in September the EU did. So when the deal pursues how will Shell account for it?

All E.U. listed companies are required to use IFRS in their consolidated financial statements. The Dutch Civil Code even permits listed Dutch companies to use IFRS in their separate financial statements (KPMG, p3). As is stated in the Annual Report of Shell (2014, p5), the financial statements have been prepared in accordance with IFRS as adopted by the European Union. In IFRS is the acquisition of Shell classified as a business combination. Since 31 March 2004 is IFRS 3 effective for all business combinations (IASplus, IFRS 3). IFRS 3 outlines the accounting when an acquirer obtains control of a business, like the acquisition of Royal Dutch Shell. Before IFRS 3 was effective acquisitions were accounted for using IAS 22 (IASplus, IAS 22). There are two major differences: all business combinations are acquisitions and more distinction between intangible assets and goodwill. The latter is described in the related accounting rule IAS 38. IAS 38 requires all intangible assets acquired in a business combination to be capitalized separately and measured at fair value while under IAS 22 many intangible assets would have been classified within goodwill. The assets and liabilities that Shell acquires are accounted for using the acquisition method, measured at their fair values at the acquisition date.

These accounting standards are intended to enhance the quality of the financial statements and increase the comparability between firms’ statements (Cascino and Gassen 2015). The probability of achieving these intensions is more likely when there is regulatory oversight or supervision. A recent study found a substantial non-compliance with IFRS 3 and IAS 36 required disclosures (Glaum et al. 2013). This indicates that, even though, IFRS is mandatory for all EU listed firms, they do not fully comply with these standards. Since the new IFRS 3 and the related IAS 38 have major impact on the income statement (Carlström 2006), it should be evident whether companies comply with these accounting standards. These previous studies raise the question whether compliance with IFRS is influenced by capital market supervision and reporting enforcement. And more specifically, what variables of reporting enforcement determine the compliance. This leads to the following research question: Does more reporting enforcement lead to a higher compliance with IAS 38 and IFRS 3?

The aim of this paper is to provide a more in-depth and better understanding on the influence of reporting enforcement on the compliance with IFRS. Specifically, how reporting enforcement can

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5 contribute in improving compliance with IFRS3 and IAS 38. Figure 1 gives a schematic view of the relations that are studied in this paper. The results of the linear regression model of below variables show a somewhat different outcome compared to prior literature. On company-level this study did not found any significant relation to the compliance levels. While at country-level only the EU and rule of law are found to have a significant relation to required disclosure compliance. When executing additional tests, these country level variables are supported and some evidence is found for a positive influence of a formal enforcement system on compliance of firms domiciled in that country.

Figure 1: Influence of reporting enforcement variables and company-specific variables on IAS 38/ IFRS 3 compliance.

Independent variables Dependent variable

Reporting enforcement Company-specific determinants determinants

This paper delivers three major contributions to the existing literature. First, it extends previous research by studying a different setting, comparing countries instead of a longitudinal study. Previous research (Glaum et al. 2015, p196) state that compliance levels are jointly determined by company- and country-level variables. Country-level variables are for example the size of capital markets and the strength of enforcement. The results of the paper show a significant influence of these

- CODE - EU - FORMAL_ENFORCE - RULE_LAW - AVERAGE_ENFORCE - AVERAGE_ENFORCE_EXC Compliance with IAS 38 under IFRS 3 - COMBINATIONS - INTANGIBLE_ASSETS - AUDITOR - SIZE - US_LIST - AUDIT_COM

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6 variables on the compliance with IFRS 3 and IAS 36. This need to be interpreted with caution, because of the existence of complex relationships between the size of capital market, enforcement mechanisms and other country-based variables that evolve jointly over time. To add some value, this study used several proxies for enforcement. Where being a European Union member, relatively high values of rule of law and a formal enforcement system are found to have a positive influence on the compliance rates. At the same time this study will exclude the joint movement over time by comparing countries instead of looking at changes over time. However, in this setting other country-specific variables might have influenced the outcome on the common law test. Another study from several years ago (Daske et al. 2008) state that the effects after the mandatory implementation of IFRS are possible to be temporary as well as increasing over time as firms get more experienced with IFRS. This study provided information that enforcement still has a positive influence on compliance.

Second, while prior studies focused on the compliance of IFRS rules in general (e.g. Glaum et al. 2015; Atanasovski 2015), only few research is available on the compliance with IAS 38 under IFRS 3. This study gives a more in-depth view on the compliance of a standard that changed recently to provide more comparability. Coste et al. (2014) did some research on disclosures in accordance with IAS 38 in the financial statements reported by listed companies from Romania and Hungary. These are both emerging market countries. For this research several countries, with difference in reporting enforcement, are compared and related to compliance with IFRS 3 and related IAS 38. One of the results is that companies domiciled in an EU country are disclosing more required information compared to Russia.

And third, this paper studies the relation between enforcement and compliance in greater detail. Holthausen (2009) questions the appropriateness of the measures of enforcement used in the literature. Prior studies typically use ‘rule of law’ as a proxy for enforcement based on studies of La Porta et al. (1998) and Kaufmann et al. (2009), this measure has two possible inadequacies. The first shortcoming is that the variable is perception-based and does not incorporate how rules are implemented. Another drawback is that the variable is not specific enough, it covers legal rules but does not capture auditing and accounting enforcement. Therefore, this thesis extends prior research by testing four enforcement proxies for their relation to compliance. Previous research did provide some evidence on the relation between enforcement and compliance. But several countries around the world substantially revised their enforcement, auditing and governance regimes. And at the same time these studies were focused on the period after the introduction of mandatory IFRS reporting. Since then companies got more experienced with the rules and standards (Daske et al. 2008). The results of this study indicate that the convergence projects of EU countries, where they share their experience, provide better disclosure compliance.

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7 The remainder of the paper is structured as follows. In the next section, the used theory is outlined and related to the context in the literature review. Subsequently, the research method applied in this study is discussed. And the paper concludes with a reference list.

2 Literature review

In order to explore the relation between reporting enforcement and compliance with the required disclosures of IFRS 3 and IAS 38 one has to understand both concepts. This section starts with explaining the International Financial Reporting Standard 3 (IFRS 3) and the International Accounting Standard 38 (IAS 38). Followed by a description of reasons for companies to comply with the disclosures required by IAS 38 (intangible assets) and IFRS 3 (business combinations). Finally, the theory section covers the concept of reporting enforcement and some related capital market supervision.

2.1 IFRS 3 and IAS 38

Since the introduction of IAS 22 Business Combinations in November 1983, two revised versions have been issued by the International Accounting Standards Board (IASB). These accounting standards were effective until March 2004 when the IASB superseded IAS 22 and three related Interpretations (SIC-9

Business Combinations-Classification either as Acquisitions or Uniting of Interests, SIG-22 Business Combinations-Subsequent Adjustment of Fair Values and Goodwill Initially Reported and SIG-28 Business Combinations-‘Date of Exchange’ and Fair Value of Equity Instruments) by issuing IFRS 3 Business Combinations (IFRS Foundation 2015).

The objective of IFRS is to enhance the relevance, reliability and comparability of the information that an entity provides in its financial statements (Daske et al. 2008 and Cascino and Gassen 2015). In this case (IFRS 3), particularly the information on a business combination and its effects. IFRS 3 Business Combinations is part of the joint effort by the IASB and FASB to improve financial reporting and converging the accounting standards. One of the primary changes of the new rule is that all business combinations are treated as acquisitions and use the same accounting method – the acquisition method. To reach IFRSs objective, IFRS 3 established principles and requirements for how an acquirer [1] recognizes and measures in its financial statements the identifiable assets acquired…; [2] recognizes and measures the goodwill acquired or a gain from a bargain purchase and [3] determines what information to disclose. One of the recognition conditions is that the acquirer should recognize, separately from goodwill, the acquired identifiable intangible assets that the acquiree did not recognize as assets because it developed them internally and charged the related

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8 costs to expenses. An intangible asset is identifiable if it meets either the separability or contractual-legal criteria in IAS 38.12 (Deloitte 2015). For determining what information to disclose paragraph 59 states:

“The acquirer shall disclose information that enables users of its financial

statements to evaluate the nature and financial effect of a business combination…”

Focusing on the Intangible assets, a firm is required to disclose on two aspects. First it needs to give a qualitative description of the factors that make up the goodwill recognized, such as intangible assets that do not qualify as identifiable. Second, the acquisition-date fair value of the identifiable intangible assets need to be disclosed.

The major improvements of IFRS 3 compared to IAS 22 are the recognition of identifiable intangible assets separate from goodwill and the equal treatment of all acquisitions. These changes are meant to increase the comparability of firms’ financial statements. The uniform accounting standards for business combinations and comprehensive disclosures can help investors estimate firm value. Driven by the globalization of capital markets the demand for comparable financial statements is rising (Glaum et al. 2013). But the comparability does not solely rely on the accounting standards itself, it also depends on whether and to what extent companies comply with those accounting standards. Even when firms report under the same set of accounting rules, the information disclosed in the annual reports is shaped by a company’s compliance incentives. Recent research showed that the financial reporting quality and comparability, for a large part, is determined by the compliance level (Ball et al. 2003 and Cascino and Gassen 2015).A lower compliance level can have three causes: [1] unintentional neglect, [2] misinterpretation of disclosure rules and [3] knowingly and intentionally fail to comply. Since IFRS is a well-known set of accounting standards and IFRS 3 and IAS 38 are effective since 2004, we assume that all non-compliance represents the latter cause.

2.2 Compliance concept

Knowingly and intentionally failing to comply with disclosure rules happens because disclosures are accompanied by costs. As well direct costs for collecting, processing and publishing as indirect costs. Indirect costs arise when the information disclosed leads to litigation, scrutiny or when it can be used by competitors (Glaum et al. 2013). This subsection will describe factors that influence whether companies decide to comply with the disclosure rules while facing these costs. As Holthausen (2009 p453) states: “Ultimately, financial reporting outcomes will represent a tradeoff between the costs and benefits of more informative financial reports (absent the effects of enforcement) and the local enforcement regime.”

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9 Although companies face cost by disclosing information required by IFRS 3 and IAS 38, firms should comply with these disclosure requirements because market liquidity increases with higher compliance levels. It’s a constant tradeoff between costs and benefits. Firms’ reporting incentives play a crucial role for disclosure levels, market liquidity is one of those reporting incentives. Besides that, the use of IFRS and comprehensive disclosures enhances the comparability of financial statements, improves corporate transparency, increases the quality of financial reporting, and hence benefits investors (Daske et al. 2008 p1086). The agency theory imposes this expectation, since there is a conflict of interest between investors and managers. Managers are able to shape reporting outcomes and are tempted to conceal some information while investors want them to disclose all information (Cascino and Gassen 2015). The findings of Christensen et al. (2013) might make it even less likely that companies fully comply with the disclosure requirements, they state that changes in accounting standards seem to have had a little effect on market liquidity. Lower market liquidity give managers less incentives to disclose all available information.

Shalev (2009) investigates factors affecting disclosure on Business Combinations. His study is carried out in a different setting since the US has a strict enforcement regime, oversight by the Securities and Exchange Commission, and reports under US GAAP. But due to recent convergence projects his study might provide us some initial insights. Purchase price, ownership structure and managers’ stock-based incentives are discussed for their possibility to affect disclosure decisions. The only significant evidence found is that disclosure levels on business combinations are lower when there is an excess amount allocated to goodwill. Where goodwill is the residual value after allocating fair value changes to identifiable assets acquired. This suggests that managers from the acquiring firm provide less comprehensive information on acquisitions that add less value. This paper is completely focused on company-specific factors that might influence mangers’ decisions in disclosing information on business combinations. But the SEC raises significant concerns with respect to the cross-country heterogeneity of IFRS application and compliance with disclosure rules (Cascino and Gassen 2015).

Researchers (Glaum et al. 2013) found substantial non-compliance with IAS 36 disclosures in 2005 financial statements. The non-compliance is explained by them as a function of both company-specific and country-company-specific factors. In line with these results, Cascino and Gassen (2015) found low disclosure compliance levels. However, they did not find substantial differences between Italy and Germany in accounting measurement compliance, except for the accounting standards IAS 38 and IAS 39. Where Italian companies showed significant higher compliance levels than German companies. Although there are dissimilarities between the papers, both studies discuss country- and company-specific determinants. And show that reporting practices continue to differ systematically across Europe despite the adoption of IFRS.

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10 The International Accounting Standard Board (IASB) shift some of their focus from delivering high-quality accounting standards to the implementation and enforcement of IFRS. According to a review by the CESR1_{in 2007 was reporting for business combinations a major problem area for} compliance with IFRS in the first year of mandatory implementation. The UK and Germany presented reports on this, indicating that IFRS 3 and IAS 38 are “complex” and “one of the most controversial accounting standards with great impact for firms implementing IFRS for the first time”. And it appears to be an area with “the highest number of accounting errors” and “uninformative disclosures” (Glaum et al. 2013). At the same time US studies provide evidence that non-compliance in forms of accounting errors are a result of managers responding to their environmental and economic incentives. This is consistent with the findings of Daske et al. (2008) and Leuz (2006), compliance with disclosure rules is influenced by company specific reporting incentives. IFRS provide companies with substantial discretion in both recognition and valuation rules. How this discretion is used by companies depends on their reporting incentives, which are shaped by markets and countries’ institutional environments.

Thus, besides the influence of company-specific reporting incentives do country-specific factors also determine reporting outcomes. Daske et al. (2008) even state that company-specific incentives only have a significant influence in countries with strong legal enforcement. But other studies found evidence that non-compliance is influenced by both company-specific variables and country-specific variables (Glaum et al. 2013). Enforcement does play a crucial role in explaining the country-specific determinants and complements company-specific incentives in moderating the comparability and transparency effect of IFRS implementation (Cascino and Gassen 2015).

2.3 Reporting enforcement by countries

Cascino and Gassen (2015) conclude from their analysis that country-level reporting enforcement enhances the comparability of accounting information and that this effect complements the moderating effect of company-specific compliance incentives. This section overviews prior research on the relation between countries’ pressure and the compliance with IFRS. Some basic expectations and explanations for a correlation between enforcement and compliance are presented below. And those are the foundation for the hypothesis described in this section.

Though most studies provide evidence for a positive correlation between enforcement and compliance, Bova and Pereira (2012) state that enforcement is not necessary. Their study shows the determinants of IFRS compliance for firms in Kenya, a country with a relatively open capital market but limited enforcement resources. Companies that perceive limited enforcement have relatively much

1_{The Committee of European Securities Regulators (CESR) got a supervisory role in securities regulating and}

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11 discretion. Even though, the authors found evidence that (private) companies in Kenya prefer to comply with IFRS when there is a conflict between national GAAP and IFRS2_{. The reason being that} companies who face low enforcement have economic incentives to achieve higher levels of compliance. On the other hand, Daske et al. (2008) provide evidence that a combination of both economic incentives and enforcement lead to higher compliance levels. With the mandatory implementation of IFRS, firms were unlikely to make material changes in their recognition and valuation policies. And also in their (footnote) disclosures. Even when IFRS 3 and IAS 38 require more disclosures, it is not obvious that firms implement these standards in ways that improve the information supply. But results show that companies subject to strong reporting incentives combined with strict enforcement regimes are less likely to just implement a new IFRS without materially changing their reporting disclosures. Thus, enforcement enhances the level of compliance with IFRS but to ensure higher compliance levels enforcement should be combined with reporting incentives (Daske et al. 2008).

The country in which a company operates is an important determining factor how IFRS is implemented and a major reason for variation in implementation of IFRS. In some countries enforcement appears to be weak and therefor results in less benefits of IFRS. The application of accounting standards involves considerable judgment and the use of private information (Nobes 2006). For IFRS 3 and IAS 38 managers have options or choices within these standards. This gives managers some discretion to bias financial reporting outcomes, especially when it is combined with limited oversight (Daske et al 2008). Little enforcement and weak monitoring are likely to lead to non-compliance. Many European countries have enhanced their enforcement mechanisms and implemented formal systems trying to improve compliance (Christensen et al. 2013). But there are still doubts whether companies fully comply with IFRS because of the existing discretion (Nobes 2013). How firms use discretion is likely to depend on their reporting incentives. These are shaped by factors such as countries’ legal institutions, various market forces and firms’ operating characteristics.” An important example of market forces is reporting enforcement. Reporting enforcement seems to play a central role for the quality of financial reporting. Capital-market effects around mandatory IFRS adoption, due to higher compliance rates, only occur in countries with relatively strict enforcement regimes. Besides formal enforcement regimes Daske et al. (2008) name three other factors that indicate whether a country has relatively strict enforcement: EU member states, the distinction between code and common law, and the ‘rule of law’.

2_{Daske et al. 2008 describe that enforcement has smaller effects when there are fewer differences between}

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12 Formal enforcement system

The implementation of IFRS is surrounded by capital-market effects. One of the most important effects comprises essential changes in reporting enforcement by some EU countries. Many adopting countries made concurrent efforts to improve enforcement and governance regimes. This concurrent movements likely influenced prior studies’ findings on capital market effects. When they isolated the IFRS reporting effects, by excluding enforcement changes, their results were smaller in magnitude. This leads to some initial evidence showing that enforcement regimes influence effects around IFRS implementation (Daske et al. 2008). In a second test they find that their results only hold in countries with relatively strict enforcement regimes, further evidence for the influence of formal enforcement. And at last, they state that the capital market effects could increase over time as countries keep changing their enforcement regimes. The strength of enforcement regimes play a major role in their results. Brown and Tarca (2011) studied four European countries that implemented different enforcement models to improve the compliance with IFRS. To benefit from the advantages of one set of accounting standards, it will be necessary for companies to comply with these standards and to do so consistently across all countries implementing IFRS. When trying to achieve this outcome countries need to establish enforcement bodies with control to ‘enforce the standards’ (Brown and Tarca 2011 p. 182). France and UK already had enforcement bodies and Germany and the Netherlands were in the middle of creating an enforcement body. The enforcement of IFRS remains the responsibility of each EU member state, while it would be better to regulate it since companies with enforcement bodies show higher compliance rates (Brown and Tarca 2011).

The level of compliance not only depends on whether a country had an enforcement body but also on how strict this body regulates. UK and US regulating bodies are different and have dissimilar strict enforcement practices. Frost and Pownall (1994) found substantial noncompliance in both the US and the UK. However, the United Kingdom had lower compliance with disclosure requirements. This relatively greater compliance with US disclosure rules is partly appointed to more stringent SEC monitoring and enforcement. The SEC is seen as a stringent regulator, while the ISE promotes itself as a less strict regulator and gives firms more freedom in choices. A firm should release identical financial statements in the United States and the United Kingdom. However, its disclosures are expected to vary as a function of local conditions. Since the disclosure rules are quite similar in the US and the UK, the difference does not appear to be rule-driven, and suggests that factors other than disclosure rules influence firms’ disclosure practices (Frost and Pownall 1994). The structure and organization of entities responsible for the oversight and enforcement differ between countries, with both public and

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13 private sector bodies being used3_{(Brown and Tarca 2005). For example the degree of the sanctions} vary and have a major influence on compliance rates. The US state Oregon implemented a new enforcement program and it did not seem to change the rates of compliance. Just after a few years, when the degree of sanctions for non-compliance rose, did the compliance levels change. Thus, when the level of imposed sanctions is relatively low the effectiveness of the enforcement body will be as well relatively low (Colbert et al. 1995). Heterogeneous disclosure levels are consistent with varying enforcement systems between countries, in this case the US and the UK.

According to Ernstberger et al. (2012) are companies characterized by low level of enforcement through internal and external mechanisms. One of these mechanisms is that companies’ compliance levels are affected by a new enforcement regime. When countries introduced a new enforcement regime they found a significant decrease in earnings management mainly due to monitoring. Monitoring can be described as “monitoring compliance of the financial information with the applicable reporting framework and taking appropriate measures in case of infringements discovered in the course of enforcement” (CESR 2003: Standard No. 1, Principle 2).

Hypothesis 1: Based on the above papers can be expected that a formal enforcement regime has

a positive influence on the compliance levels of companies domiciled in that country. At country level, the strength of an enforcement system is associated with compliance. It does not only directly influence compliance but also moderates and mediates some company level factors. Enforcement continues to play an important role in compliance despite the use of common reporting standards (Glaum et al. 2013).

European Union member

Although reporting enforcement and capital market supervision is regulated at country level in Europe, there is some trans-national oversight by the ESMA4_{. This is an independent EU authority with a} mission to improve the financial markets by building one single regulation. The creation of this regulation is mostly established by the biggest and most developed countries. Such as the way of composing the supervisory board, the procedures through which the regulatory standards are carried out, the voting method and the funding system (Marcacci 2013 and Nobes 2013). Despite the dissimilar contributions of the European countries in the establishment of one single regulation, each member state does benefit from the convergence and increased comparability of this common approach. Marcacci (2013) shows that members of the European Union are subject to oversight from

3_{The distinction between public and private sector bodies is handled below in the common versus code law}

variable.

4_{ESMA was founded as a result of the recommendations of the 2009 de Larosière report and replaced the CESR}

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14 transnational enforcement bodies. Even though most of the oversight is based on the elements of the biggest individual countries. The diversity in contribution to a common approach could be an interesting topic for future research.

The EU decided to require IFRS for consolidated accounts of listed companies and require appropriate enforcement. Just after the implementation of this requirement, two aspect made it difficult to measure the influence of enforcement. First, the introduction of new and stricter enforcement regimes required by the EU was accompanied by the implementation of a new accounting regime. Second, companies need time to develop sufficient IFRS expertise (Brown and Tarca 2011 and Cascino and Gassen 2015). Financial statement prepares have had enough time to gain experience with the accounting standards. In 2003, the Committee of European Securities Regulators (CESR) released Standard No. 1. It is non-binding but aimed at developing a common enforcement approach in the EU. Several members of the European Union created an independent administrative authority for compliance and enforcement; British FRRP, French AMF, German FREP and Dutch AFM (Daske et al. 2008). Not only new enforcement agencies were created in EU countries but they also moved to a more stringent review process, more severe penalties for non-compliance with accounting standards and increased resources available for supervisory authorities (Christensen et al. 2013). This proactive review process has similarities with the U.S. Securities and Exchange Commission’s comment and review process. Studies show that the SEC has stricter enforcement regimes compared to European enforcement systems (Shalev 2009).

The IAS Regulation that mandates IFRS reporting for listed firms, requires member states of the European Union to take appropriate actions to ensure compliance with IFRS. To achieve this goal member states receive relative more pressure (Christensen et al. 2013). Paragraph 16 of the IAS Regulation (EC) No 1606/2002 of the European Parliament states:

“Member states are required to take appropriate measures to ensure compliance with international accounting standards.”

The CESR got a supervisory and coordinating role to keep an eye on this objective. A convergence project they presented is Standard No 1. This standard is focused on the enforcement of standards on financial information in Europe. Standard No 1 sets out minimum requirements that EU member states ought to implement for an effective enforcement mechanism. It states that enforces should take appropriate actions and that they need to be carried out by independent administrative authorities. Standard no 2 further describes procedures for country-specific institutions for harmonization. Major proposals out of the first document are developed in the second standard; [1] EU national enforcers should take into account decisions taken by other enforcers, [2] decisions taken by EU national

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15 enforcers should be made available to the other EU national enforcers, and [3] enforcement decisions and experiences will be discussed at a session where all national enforcers are present (CESR standard no 1 and no 2). In 2008 27 of the member states of the European Union implemented CESR Standard No. 1, only Austria and Slovakia were still in the process of creating an appropriate external enforcement system. And in 2010 Standard No. 2 was implemented by only 9 out of 29 countries within the European Union (Wolfgang Stich 2011 p104). Austria was the last country that introduced a formal enforcement system, by the end of 2012 (ESMA 2014).

Being a member of the European Union does not mean that there will be no differences in enforcement compared to other EU members. Since enforcement will occur at national level, companies still face different levels of enforcement. Ball (2006) states that it is unlikely that IFRS will be implemented uniformly around the globe, as long as national institutions remain influential. His major concerns are “that investors will be misled into believing that there is more uniformity in practice than actually is the case and that international differences in reporting quality now will be hidden under the rug of seemingly uniform standards” (Ball 2006 p22). However, it appears that more companies voluntarily adopt IFRS in the period that European Union countries had convergence projects, with respect to enforcement changes, compared to other periods (Daske et al. 2008). Members of the European Union have their own national institutions and those remain influential. But due to convergence projects and pressure from transnational sources, like IASB and IFRIC, EU member states likely lead to better reporting incentives and higher compliance levels (Brown and Tarca 2011).

Hypothesis 2: Companies domiciled in a country of the European Union are expected tohave higher compliance rates compared to companies of a non-EU member country. Prior studies made a distinction between EU members and the rest of the world because the EU is a set of countries for which enforcement regimes are significantly revised around the adoption of mandatory IFRS reporting. And in recent years EU countries did further efforts to tighten enforcement (Daske et al. 2008 and Christensen et al. 2013). Therefore the recent setting is better able to isolate the effects of enforcement on compliance levels, compared to the setting at the time of mandatory IFRS implementation. There is also evidence that information quality differences within Europe remain even after convergence efforts. But these differences are minimal. Especially compared to difference between an EU and non-EU member. The differences between member states of the European Union are smaller due to concurrent efforts to improve enforcement (Daske et al. 2008).

Code law versus common law

Investors believe that variation in the enforcement of IFRS would lead to an increase in the exercise of managerial discretion when applying IFRS. This concern of investors is supported by the findings of Armstrong et al. (2009). They find a negative stock market reaction to events that affect the likelihood

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16 of IFRS adoption in code law countries. This is mainly based on the idea that code law countries are generally thought to have weaker accounting standards enforcement. And that firms in code law countries may retain greater flexibility in the application of IFRS. But the authors do stat that this could be attributable to other factors associated with firms being domiciled in a code law country.

That other factors could play a role is seen in the different opinions presented in papers on the strength of enforcement in code or common law countries. According to Ball et al. (2000) is the extent of political influence on enforcement one of the most fundamental variables causing international differences. They stat that code-law countries have comparatively strong political influence on accounting at national and firm levels. Governmental bodies in these countries establish and enforce national accounting standards. While in common law countries enforcement is executed by private bodies, involving private lawsuits. The former leads to a ‘stakeholder’ model in which major capital suppliers are concentrated in institutions. Potential information asymmetry is likely to be solved through internal communication or private meetings with debt holders. This results in a lower demand for enforcement of reporting standards (Ball et al. 2003). A country’s legal system (code or common law) determines partly the capital structure of its companies and thereby the demand for enforcement.

Even though Ball et al. (2000) justify the stricter accounting enforcement under code law systems, most studies agree with the idea that code law countries have weaker enforcement. Daske et al. (2008) and Glaum et al. (2013) both found higher disclosure levels for companies domiciled in common law countries. And defend their findings by stating that common law countries have more stringent enforcement regimes. Some studies associate code-law regimes with “legal rigidity and bureaucratic ossification”, but Jackson (2007) shows the opposite for enforcement in the financial area. It is stronger and there are more frequently sanctions used for non-compliance. Also these sanctions are higher and have more impact. In common law countries are both the budget and the number of people involved in enforcement higher compared to code law countries. Jackson (2007) even asks himself if it is not law, but enforcement that matters.

Hypothesis 3: Expected is that firms in code law countries show less compliance with IAS 38

compared to countries with a common law system. There are some opposing forces in the existing literature but above presented ideas mainly support this hypothesis. Compliance levels on disclosures are found to be relatively high in common law countries compared to those at companies domiciled in code law countries. Most previous studies in the area of enforcement of financial reporting are focused on common-law countries, only a few recent studies focus on code-law countries (Ernstberger et al. 2012). Thus the outcome of testing this hypothesis can create new insights in the field of litigation.

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17 Rule of law

The component rule of law assesses a country’s law and order tradition (La Porta et al. 1998 p 1124). It captures perceptions of the extent to which agents have confidence in and abide by the rules of society, including the quality of contract enforcement and the courts (Kaufmann et al. 2009). Courts that are corrupt, costly or not working efficiently could give firms incentives to not fully comply. Legal institutions that support effective implementation are equally important as the accounting standards. These legal institutions cover process of law making and the enforcement of rules (Worldbank 2012 and Hope 2003).

The rule of law is an assessed value constructed from a list of individual variables in the Worldwide Governance Indicators. Data on these variables are provided by a large number of enterprise, citizen and expert survey respondents in industrial and developing countries (Worldbank 2012). Higher scores for rule of law represent countries with stricter enforcement regimes. The IFRS mandate is unlikely to have much of an effect if legal enforcement is weak. Liquidity in IFRS adopting countries with stronger rule of law increases relatively much compared to countries with weaker rule of law. Findings show that companies in countries with a strong rule of law present more disclosures on their earnings. The transparency of information in annual reports, and thereby compliance levels increase (Daske et al. 2008).

The use of rule of law as a determinant for enforcement is not as strong as the other three proxies. The underlying rule of law variables have two major drawbacks. The variables are either based on perceptions or on aggregation of legal rules. The variables that are based on perceptions might be influenced by local conditions and respondents are able to influence the outcome. Respondents in one country might answer a survey of the same variable different from a respondent in another country. Not because there are real differences, but because the persons have a different perception. At the same time could there be perception differences within a country. For these reasons, the perception based rule of law variables might be biased. On the other hand, when variables are based on aggregation of legal rules they only present how the rules are composed and what they cover. But does not show the information that is needed, namely how the rules are implemented. Possible implementation or enforcement differences between countries are not visible (Moscariello 2014).

Hypothesis 4: Expected is that the rule of law variable is positively associated with the compliance

levels of companies in that country. Rule of law variables shows a country’s law and order tradition and higher values represent countries with stricter enforcement. Although Moscariello (2014) states that rule of law is an incomplete measure, we will use it since a lot of other studies use it (for example: La Porta et al. 1998, Kaufmann et al. 2009 and Daske et al. 2008).

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18 In this subsection the concepts of compliance and reporting enforcement are combined to create the hypotheses for each of the enforcement proxies. All country-specific variables are positively associated with higher compliance levels, except for code law. “All else equal, in countries with stricter enforcement regimes companies are less likely to get away with adopting IFRS merely as a label, without materially changing their reporting practices.” (Daske et al. 2008 p1094). So the Central hypothesis of this paper will be that enforcement has a significant influence on the level of compliance. And is tested through above four proxies. A Common law country with a formal enforcement system, member of the European Union and a relative high rule of law value is expected to have companies that show the highest compliance levels. These proxies are used to measure enforcement practices of countries and assumes these practices are diverse. In some countries the financial statements of listed companies are scrutinized by regulatory bodies while in other countries, where capital markets play a lesser role in financing, enforcement systems are less developed (Glaum et al. 2013). When Glaum et al. (2013) studied the relation between enforcement and compliance in 2005 financial statements, only a minority of European Union countries implemented formal enforcement systems. Since then almost all EU countries have enhanced their enforcement mechanisms (Christensen et al. 2013and Ernstberger et al. 2012).

2.4 Other perceived reporting enforcement

Compliance levels are not solely determined by country-specific enforcement but also by other, company-specific, factors. These factors are not being discussed in great detail since this thesis is focused on country-level enforcement. But it will provide some general theory that is needed for testing the model. This part of the theory mainly consists of the ideas of Glaum et al. (2013), the paper on which the model is based. The main idea behind this model is that compliance is influenced by both country-specific and company-specific factors.

Glaum et al. (2013) are describing several company-specific variables in their model. This paper’s model is slightly changed so it will better fit the research. One variable Glaum et al. (2013) used is goodwill, measured as the ratio between goodwill and the total assets. It was used because the reporting of goodwill is complex and requires valuation skills. For this same reason a variable representing the intangible assets, acquired at the business combination, is used. Intangible asset will represent the ratio between intangible assets and the total assets. A higher value is expected to show increased levels of compliance. Higher values of intangible assets means less allocation of the purchase price to goodwill. When firm assign relatively high values to intangible assets compared to goodwill are they less likely to manage earnings through impairments (Shalev 2009).

Beside the ratio between intangible assets and total assets, is total assets on itself a variable that can influence compliance with disclosure requirements (Glaum et al. 2013). Expected is that bigger

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19 acquisitions lead to higher compliance rates. When the purchase price of an acquisition is higher, the acquisition will be more material to the acquiring company. The demand for disclosures increases as the investors will pay more attention to it and increases the change to potential scrutiny (Leuz 2006). Next to the size of the acquisition name Glaum et al. (2013) various studies that provide evidence for a positive relation between the size of the acquiring firm and their compliance levels. Bigger firms already disclose a lot of information and disclosure costs decreases “per unit of size” (Cascino and Gassen 2015).

The big 4 variable might be correlated with the size of the acquiring firm since bigger companies are more often audited by a big 4 auditor. But according to prior literature is a big 4 firm related to higher compliance. Larger audit firms have more resources to train their employees, have more experts in each industry and stronger incentives to protect their reputation (Daske et al. 2008 and Cascino and Gassen 2015). Even though there are some contradicting papers (Armstrong et al. 2009 and Colbert et al. 1995), higher compliance with disclosure requirements is foreseen for firms audited by a big 4 company.

Companies that are cross listed in the United States are receiving relatively much reporting enforcement. Lang et al. (2006) provide information that US firms use less discretion afforded US GAAP compared to foreign companies. The SEC allows cross listed firms to make reconciliations to US GAAP (Leuz 2006), but the cross listed firms in this paper need to issue financial statements reporting under IFRS and still face the enforcement of the SEC. Glaum et al. (2013) agree with this expectation since firms that are cross list voluntarily subject themselves to stricter enforcement.

At last the audit committee is expected to influence the disclosure compliance levels of a company. The audit committee is a separate committee of the supervisory board and is established to review the financial process of a company and discuss the annual report during a meeting (Cascino and Gassen 2015). Since (nearly) all companies have an audit committee, the number of meetings is likely to have more influence on the compliance level. Companies with stronger corporate governance are showing higher compliance rates with required disclosures by IFRS (Glaum et al. 2013). Thus, expected is that the number of audit committee meetings has a positive relation with the compliance level on disclosures.

3 Data and Method

This section first comprises the sample chosen to test the model described in the following part. After that, both the dependent and independent variables are outlined. And eventually, the research methodology is summarized.

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3.1 Sample

To find out whether enforcement influences the compliance level with IFRS 3 and IAS 38, data is obtained that reflect both enforcement and reports under the IFRS accounting standards. This dataset is compiled out of a sample of listed companies located in four different countries with mandatory IFRS implementation. From each of these countries the twenty companies with the biggest acquisitions in 2012 are selected, measured as a percentage of the acquirer’s total assets.

According to Daske (2008) are the effects after the implementation of a new accounting standard possibly misleading. The effect might be temporary or can increase/decrease when financial statement preparers get more experienced with the standard. Since IFRS 3 superseded IAS 22 on 31 March 2004, financial statement preparers should have enough skills by the end of fiscal year 2012. Concurrent with the mandatory implementation of IFRS 3, is increased enforcement required by the European Union. By 2006 only a minority of EU countries had established enforcement processes (Glaum et al., 2015). But several other articles indicate a change in the reporting enforcement process and an increase in capital market supervision in recent years (Christensen et al. 2013 and Ernstberger et al. 2012). Taking into account the change in the accounting regime combined with the potential influence of changes in reporting enforcement, the best fit for this study is data gathered from 2012 consolidated statements.

In the theory section are four country-specific variables described, that indicate the degree of enforcement in these countries. Three of these variables are used to select the countries of the sample. The countries are chosen because they carry different values for each of the variables. Austria was the last country in the European Union that did not have a formal IFRS enforcement system, up until December 2012 (ESMA 2014). While the UK and Russia did already work on their enforcement framework (OECD 2005 and Enforcement in the European Union 2006) and Germany implemented a two-tier enforcement system (Wolfgang Stich 2011). Looking at the second variable, is only the United Kingdom a common law country and the other three countries have a code law system. For the third variable Russia is selected, since Russian firms are required to implement IFRS and it’s a non-European Union country. Austria, Germany and the United Kingdom are European Union members and thereby subject to transnational oversight and enforcement.

Some of the Russian and German companies from the initial sample presented their annual reports just in their own language. Due to this reason they are not included in this research but instead the next biggest acquisition of that country are taken. Besides, in the sample are two Russian companies excluded for not following IFRS but instead presenting reports with US GAAP. Altogether, to test the hypotheses of this paper data is gathered from the annual reports of twenty firms with material acquisitions in Austria, Germany and the United Kingdom and from eighteen Russian firms.

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3.2 Model

The explanatory power of company- and country-level variables is similar. At the company level, the size of intangible assets, the type of auditor, and the existence of audit committees are associated with compliance. At country level, countries’ enforcement are associated with compliance. Enforcement is in this study tested on the basis of four proxies. From the company- and country-specific variables follows a model that to the model used by Glaum et al. (2013). However, the model is slightly adjusted to fit this study. The original model proposes compliance as a function of both country- and company-level determinants. Where the function exists of four country-company-level variables that explain the compliance: [1] the distance between national systems and IFRS, [2] the development of capital markets, [3] cultural values and [4] the level of country enforcement. Since the first three variables are outside the scope of this study, the model will exclude the first three and focus on the fourth variable. Specifically, it splits the enforcement determinant in several variables. Thus, this research describes compliance as a function of enforcement variables on the one hand, and company-specific variables on the other hand. Where the focus is put on the enforcement-specific variables and the company-level variables are not of primary interest. The distance between national GAAP systems and IFRS is not useful for this study since IFRS have been used for many years in these countries. The variables used in this model are divided into three groups. First the dependent variable is described and thereafter the two groups of independent variables. Table 1 presents a schematic overview of all variables used.

Table 1: overview of all variables used in this study.

Variable Description Source

Panel A Dependent

Compliance Index An indicator that represents the compliance level of a company; measured as an average of disclosure requirements

Average of variables below

Useful life Whether the useful life or

amortization rate for each class of intangible assets is stated in the annual report

Hand collected from annual reports

Amortization method Whether the amortization method for each class of intangible assets is stated in the annual report

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22 Gross carrying amount Whether the gross carrying

amount and any accumulated amortization and impairment losses on intangible assets are recognized in the annual report

Line item in income statement Whether the line item in the income statement in which amortization is included is disclosed

Reconciliations Whether the annual report contains a reconciliation of the carrying amount at the beginning and the end of the period

Basis for indefinite life Whether the basis for indefinite life is disclosed in the annual report

Classification in intangible assets

Whether a company classified different intangible assets or put it all under the name ‘other intangible assets’

Panel B Independent: country-level

FORMAL_ENFORCE Whether a country has a formal reporting enforcement system

Papers discussed in literature review.

EU Whether a country is a

member of the European Union

Website europa.eu

CODE A country’s legal system; code

law or common law

Website cia.gov

RULE_LAW A country’s rule of law; the

law and order tradition of a country, where higher values represent stricter

enforcement

Website worldbank.org

AVERAGE_ENFORCE A country’s average reporting enforcement; measured through a weighted average

Composition of above variables

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23 of the four enforcement

indicators

AVERAGE_ENFORCE_EXC A country’s average reporting enforcement; measured through a weighted average of the enforcement indicators where the rule of law is excluded.

Composition of above variables

Panel C Independent: company-level

COMBINATIONS Size of the acquisition. Measured as the total consideration paid for the acquisition(s)

INTANGIBLE_ASSETS Ratio between intangible assets and total assets of acquired firm(s)

AUDITOR Whether a company is

audited by a big 4 auditor

SIZE Size of the acquiring

company. Measured as total assets of acquiring company

Data available at Compustat

US_LIST Whether the acquiring

company is cross listed in the United States

Data available at Compustat

AUDIT_COM The number of audit

committee meetings

3.2.1 Dependent variable

Compliance is in this study the dependent variable and is a function of the determinants described in section 3.1. Data for this dependent variable is collected through a comprehensive study of the numbers and footnote disclosures provided in consolidated financial statements of some European companies. Although companies are provided with discretion in standards IFRS 3 and IAS 38, these standards do provide requirements. To measure compliance a checklist comprising all required disclosures for business combination and intangible assets by IFRS 3 and IAS 38 is developed. In this model each checklist item is coded 1 if it is disclosed in the financial statements and it gets a score 0 if

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24 not disclosed. The summed scores are presented as the compliance index. The total compliance index is calculated as:

𝐶𝑜𝑚𝑝𝑙𝑖𝑎𝑛𝑐𝑒 𝐼𝑛𝑑𝑒𝑥 = ∑ 𝑑

_𝑖

𝑛

𝑖=1

Where di is 1 if the checklist item is disclosed and 0 if not, and n is the total number of checklist items. The sum is divided by the total number of checklist items to get a score for the compliance level of each firm. Each checklist item score is weighted the same, since different financial statement users will choose different weighting factors depending on their interests (Atanasovski 2015). The individual scores are then tested for a relation with the enforcement proxies, as described in section 3.1. Glaum et al. (2015) used this method in assessing the compliance with IFRS 3 and IAS 36. And Atanasovski (2015) uses this method in testing compliance with IFRS 7.

The accounting standard IAS 38 Intangible Assets is roughly divided into the recognition, measurement and disclosure requirements. The rules on disclosure are described in IAS 38.118 till IAS 38.125 (IASplus, IAS 38). A list of all required disclosures is included in appendix A. A selection is made for this research and a brief overview on the disclosures required for all companies that obtain control of a business (IFRS 3) is given. Not all disclosure requirements are checked since some of them are very specific or require more (inside) information than is publicly available. The selected disclosure requirements are outlined in table 1 panel A together with the source of this data. When collecting the data and assigning scores to the compliance index components the following assumptions are made. First, the exact useful life or amortization rate used is never disclosed for each separate intangible asset. In most of the annual reports is a timespan given. For example a specific group of assets is amortized on a straight-line basis over 3-7 years. If this was the case ‘useful life’ gets scored as disclosed. Second, at some of the business combinations it is unclear whether intangible assets with an indefinite useful life were acquired. When nothing is disclosed and there are no significant indicators for such an asset, ‘basis for indefinite life’ gets a zero score. Third, some companies did not make a specification of the different classes of intangible assets in their reconciliation table. The classification variable gets a score zero since firms have to disclose information on each class of intangible assets. And fourth, companies need to disclose the line item in the income statement in which the amortization is included. Some of the annual reports did not state separately in what line item it is included but do have a line item called ‘depreciation and amortization’, then the checklist item scores one. Despite my best effort, I acknowledge that the measurement of compliance with IFRS

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25 3 and related IAS 38 remains somewhat subjective. The scores might contain some errors, since there was no review by a second person.

3.2.2 Independent variables

The independent variables in this paper are divided into two subgroups. First, the variables that represent the enforcement differences between the countries researched. The second set of variables exists of company specific determinants. These can be seen as (perceived) enforcement differences within countries.

3.2.2.1 Enforcement variables

The potential influence of country-specific enforcement variables are described in the literature review and presented in table 1 panel B. FORMAL_ENFORCE is the dummy variable for countries having a formal enforcement system. Austria is the only country of this sample which has not implemented a formal enforcement system in 2012. As a result of the Accounting Control Act, a two-tier enforcement system has been created in Austria in December 2012. This enforcement system is effective for the annual reports ending in 2013 or later. Germany and the UK enforcement is performed by a created body (ESMA 2014). In Germany this is a two-tier enforcement system, a combination of a public authority and a private body (Wolfgang Stich 2011). And the UK implemented an oversight board in 2005 (enforcement in the European Union 2006). In former Soviet Union monitoring relied mostly on informal and personal networks, Russia’s first government after the Soviet Union made this more formal. And implemented bodies that had a monitoring role, such as the Account Chamber (OECD 2005). The next variable is EU, representing whether a country is member of the European Union. Germany is since the beginning of the European Union a member, while Austria and the United Kingdom joined later on. Russia is an independent country and has never been a member of the EU (website: Europa.eu). Only one of these countries has a common law system, the other three are code law based. For this distinction is the dummy variable CODE used. At last, RULE_LAW represents the value of a country’s rule of law. It is a number between zero and one based on different data sources.

3.2.2.2 Company specific variables

The model presented in this study shows compliance as a function of enforcement- and company-specific determinants, based on the model of Glaum et al. (2013). Since the focus of this thesis is on enforcement differences between countries, only the company-specific variables for which data is publicly available in the Compustat database are used. These variables are described in the literature review section of this paper and in table 1 panel C. For the variables COMBINATIONS and SIZE the log is used, to scale the variable and to create to opportunity for a linear relation instead of a monotonic

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26 one. SIZE is the log of total assets of the acquiring company, while COMBINATIONS is the log of total assets of the acquired company. The variables US_LIST and AUDITOR are both dummy variables. If US_LIST has a value of one it means that the company is cross listed in the United States. For Auditor means a value of one that the company is being audited by a big 4 company. As stated before each of the independent company-specific variables is expected to be positively associated to compliance levels of required disclosures by IFRS 3 and IAS 38. Daske et al. (2008) mention their concern that country-specific variables are all highly correlated and that some of them are outcomes of countries’ institutional frameworks”. In this paper’s model is AUDIT_COM the only variable that can be subject of this statement. A country could enforce audit committees to meet a number of times and this could potentially influence the studied relation between enforcement and compliance.

3.3 Research methodology

This subsection describes the models that are tested to support the hypotheses and to find an answer on the research question. First is tested whether the varying compliance levels between countries are significant using t tests for mean differences. Second, to test this thesis hypotheses four tests are performed, which are schematically overviewed in figure 1. The first test is only using the country-specific variables to test for a positive relation between the reporting enforcement determinants and the compliance level.

In the second test company specific variables are added to gain a more robust model which includes all variables discussed in the theory section. This model is based on models previously used in testing compliance with IFRS rules (Glaum et al. 2015 and Antanasovski et al. 2015). The second test has one major flaw, each country-specific variable is set off against the other countries. Austria got a score zero for formal enforcement system and the UK scored one. In the second test this zero of Austria is set off against the one of the UK, while both countries have two variables with a score of one. Since all country-specific variables are weighted the same, the results of this test does not show the rule of enforcement but rather tests for each independent variable whether it has significant influence on the compliance level.

To rule out the differences between the country-specific variables, these determinants are aggregated into a new variable; AVERAGE_ENFORCE. This variable is a weighted average of the four enforcement proxies and used in test three. This test better isolates the potential influence of enforcement in the companies’ compliance levels.

The AVERAGE_ENFORCE includes all four country specific variables; (1) CODE, (2) EU, (3) FORMAL_ENFORCE and (4) RULE_LAW. The latter variable has some shortcomings and its appropriateness is questioned in prior studies (Holthausen 2009). For this reason the fourth test comprises only the first three country-specific variables together with the company-specific variables.

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27 (1) Compliance = α + β1CODE + β2EU + β3FORMAL_ENFORCE + β4RULE_LAW + ε

(2) Compliance = α + β1CODE + β2EU + β3FORMAL_ENFORCE + β4RULE_LAW + β5COMBINATIONS + β6INTANGIBLE_ASSETS + β7AUDITOR + β8SIZE + β9US_LIST + β10AUDIT_COM + ε

(3) Compliance = α + β1AVERAGE_ENFORCE + β5COMBINATIONS + β6INTANGIBLE_ASSETS + β7AUDITOR + β8SIZE + β9US_LIST + β10AUDIT_COM + ε

(4) Compliance = α + β1AVERAGE_ENFORCE_EXC + β5COMBINATIONS + β6INTANGIBLE_ASSETS + β7AUDITOR + β8SIZE + β9US_LIST + β10AUDIT_COM + ε

Figure 1: Influence of reporting enforcement variables and company-specific variables on IAS 38/ IFRS 3 compliance.

Independent variables Dependent variable

Reporting enforcement Company-specific determinants determinants (1) (2), (3) and (4) - CODE - EU - FORMAL_ENFORCE - RULE_LAW - AVERAGE_ENFORCE - AVERAGE_ENFORCE_EXC Compliance with IAS 38 under IFRS 3 - COMBINATIONS - INTANGIBLE_ASSETS - AUDITOR - SIZE - US_LIST - AUDIT_COM

Influence of reporting enforcement on compliance with IAS 38

Amsterdam Business School